Friday, March 21, 2014

Russia long game includes strengthening ties with China - natural gas deal set for May ? Ukraine and Europe to be left on the outside looking in ?

http://www.zerohedge.com/news/2014-03-21/petrodollar-alert-isolated-west-putin-prepares-announce-holy-grail-gas-deal-china


Petrodollar Alert: Putin Prepares To Announce "Holy Grail" Gas Deal With China

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If it was the intent of the West to bring Russia and China together - one a natural resource (if "somewhat" corrupt) superpower and the other a fixed capital / labor output (if "somewhat" capital misallocating and credit bubbleicious) powerhouse - in the process marginalizing the dollar and encouraging Ruble and Renminbi bilateral trade, then things are surely "going according to plan."
For now there have been no major developments as a result of the shift in the geopolitical axis that has seen global US influence, away from the Group of 7 (most insolvent nations) of course, decline precipitously in the aftermath of the bungled Syrian intervention attempt and the bloodless Russian annexation of Crimea, but that will soon change. Because while the west is focused on day to day developments in Ukraine, and how to halt Russian expansion through appeasement (hardly a winning tactic as events in the 1930s demonstrated), Russia is once again thinking 3 steps ahead... and quite a few steps east.
While Europe is furiously scrambling to find alternative sources of energy should Gazprom pull the plug on natgas exports to Germany and Europe (the imminent surge in Ukraine gas prices by 40% is probably the best indication of what the outcome would be), Russia is preparing the announcement of the "Holy Grail" energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis. One which, as some especially on these pages, have suggested would lay the groundwork for a new joint, commodity-backed reserve currency that bypasses the dollar, something which Russia implied moments ago when its finance minister Siluanov said that Russia may refrain from foreign borrowing this year. Translated: bypass western purchases of Russian debt, funded by Chinese purchases of US Treasurys, and go straight to the source.
Here is what will likely happen next, asexplained by Reuters:
Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow's seizure of the Black Sea peninsula from Ukraine would be counter-productive.

The underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances. 

The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.
More details on the revelation of said "Holy Grail":
State-owned Russian gas firm Gazprom hopes to pump 38 billion cubic meters (bcm) of natural gas per year to China from 2018 via the first pipeline between the world's largest producer of conventional gas to the largest consumer.

"May is in our plans," a Gazprom spokesman said, when asked about the timing of an agreement. A company source said: "It would be logical to expect the deal during Putin's visit to China."
Summarizing what should be and is painfully obvious to all, but apparently to the White House, which keeps prodding at Russia, is the following:
"The worse Russia's relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you're isolated," said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.
Bingo. And now add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China's largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.
As reported previoisly, China has already implicitly backed Putin without risking it relations with the West. "Last Saturday China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the referendum in which Crimea went on to back union with Russia. Although China is nervous about referendums in restive regions of other countries which might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow. The support of Beijing is vital for Putin. Not only is China a fellow permanent member of the U.N. Security Council with whom Russia thinks alike, it is also the world's second biggest economy and it opposes the spread of Western-style democracy."

This culminated yesterday, when as wereported last night, Putin thanked China for its "understanding over Ukraine." China hasn't exactly kept its feelings about closer relations with Russia under wraps either:
Chinese President Xi Jinping showed how much he values ties with Moscow, and Putin in particular, by making Russia his first foreign visit as China's leader last year and attending the opening of the Winter Olympics in Sochi last month.

Many Western leaders did not go to the Games after criticism of Russia's record on human rights. By contrast, when Putin and Xi discussed Ukraine by telephone on March 4, the Kremlin said their positions were "close".
The punchline: "A strong alliance would suit both countries as a counterbalance to the United States." An alliance that would merely be an extension of current trends in close bilateral relations, including not only infrastructure investment but also military supplies:
However, China overtook Germany as Russia's biggest buyer of crude oil this year thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan.

If Russia is isolated by a new round of Western sanctions - those so far affect only a few officials' assets abroad and have not been aimed at companies - Russia and China could also step up cooperation in areas apart from energy. CAST's Kashin said the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, would grow.

China is very interested in investing in infrastructure, energy and commodities in Russia, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic industries. "With Western sanctions, the atmosphere could change quickly in favor of China," said Brian Zimbler Managing Partner of Morgan Lewis international law firm's Moscow office. 

Russia-China trade turnover grew by 8.2 percent in 2013 to $8.1 billion but Russia was still only China's seventh largest export partner in 2013, and was not in the top 10 countries for imported goods. The EU is Russia's biggest trade partner, accounting for almost half of all its trade turnover.
And as if pushing Russia into the warm embrace of the world's most populous nation was not enough, there is also the second most populated country in the world, India.
Putin did take time, however, to thank one other country apart from China for its understanding over Ukraine and Crimea - saying India had shown "restraint and objectivity".

He also called Indian Prime Minister Manmohan Singh to discuss the crisis on Tuesday, suggesting there is room for Russia's ties with traditionally non-aligned India to flourish.

Although India has become the largest export market for U.S. arms, Russia remains a key defense supplier and relations are friendly, even if lacking a strong business and trade dimension, due to a strategic partnership dating to the Soviet era.

Putin's moves to assert Russian control over Crimea were seen very favorably in the Indian establishment, N. Ram, publisher of The Hindu newspaper, told Reuters. "Russia has legitimate interests," he added.
To summarize: while the biggest geopolitical tectonic shift since the cold war accelerates with the inevitable firming of the "Asian axis", the west monetizes its debt, revels in the paper wealth created from an all time high manipulated stock market while at the same time trying to explain why 6.5% unemployment is really indicative of a weak economy, blames the weather for every disappointing economic data point, and every single person is transfixed with finding a missing airplane.




Putin looks to Asia as West threatens to isolate Russia

MOSCOW Fri Mar 21, 2014 6:09am EDT
Russian President Vladimir Putin chairs a meeting of the Security Council in Moscow's Kremlin March 21, 2014. REUTERS-Alexei Druzhinin-RIA Novosti-Kremlin
1 OF 2. Russian President Vladimir Putin chairs a meeting of the Security Council in Moscow's Kremlin March 21, 2014.
CREDIT: REUTERS/ALEXEI DRUZHININ/RIA NOVOSTI/KREMLIN

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(Reuters) - When President Vladimir Putin signed a treaty this week annexing Crimea to great fanfare in the Kremlin and anger in the West, a trusted lieutenant was making his way to Asia to shore up ties with Russia's eastern allies.
Forcing home the symbolism of his trip, Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow's seizure of the Black Sea peninsula from Ukraine would be counter-productive.
The underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.
The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.
"The worse Russia's relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you're isolated," said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.
Some of the signs are encouraging for Putin. Last Saturday China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the referendum in which Crimea went on to back union with Russia.
Although China is nervous about referendums in restive regions of other countries which might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow.
The support of Beijing is vital for Putin. Not only is China a fellow permanent member of the U.N. Security Council with whom Russia thinks alike, it is also the world's second biggest economy and it opposes the spread of Western-style democracy.
Little wonder, then, that Putin thanked China for its understanding over Ukraine in a Kremlin speech on Tuesday before signing the treaty claiming back Crimea, 60 years after it was handed to Ukraine by Soviet leader Nikita Khrushchev.
Chinese President Xi Jinping showed how much he values ties with Moscow, and Putin in particular, by making Russia his first foreign visit as China's leader last year and attending the opening of the Winter Olympics in Sochi last month.
Many Western leaders did not go to the Games after criticism of Russia's record on human rights. By contrast, when Putin and Xi discussed Ukraine by telephone on March 4, the Kremlin said their positions were "close".
A strong alliance would suit both countries as a counterbalance to the United States.
WARM EMBRACE, BUT NO BEAR HUG
But despite the positive signs from Beijing, Putin may find China's embrace is not quite the bear hug he would like.
There is still some wariness between Beijing and Moscow, who almost went to war over a border dispute in the 1960s, when Russia was part of the Communist Soviet Union.
State-owned Russian gas firm Gazprom hopes to pump 38 billion cubic meters (bcm) of natural gas per year to China from 2018 via the first pipeline between the world's largest producer of conventional gas to the largest consumer.
"May is in our plans," a Gazprom spokesman said, when asked about the timing of an agreement.
A company source said: "It would be logical to expect the deal during Putin's visit to China."
But the two sides are still wrangling over pricing and Russia's cooling relations with the West could make China toughen its stance. Russian industry sources say Beijing targets a lower price than Europe, where Gazprom generates around half of its revenues, pays.
Upheaval at China National Petroleum Corp, at the centre of a corruption investigation, could cause also delays, and Valery Nesterov, an analyst with Sberbank CIB in Moscow, said China also needs time to review its energy strategy and take into account shale gas and liquefied natural gas (LNG).
"The bottom line is that the threat of sanctions on energy supplies from Russia has indirectly strengthened China's position in the negotiations," Nesterov said.
BOOSTING BUSINESS
Russia meets almost a third of Europe's gas needs and supplies to the European Union and Turkey last year exceeded 162 bcm, a record high.
However, China overtook Germany as Russia's biggest buyer of crude oil this year thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan.
If Russia is isolated by a new round of Western sanctions - those so far affect only a few officials' assets abroad and have not been aimed at companies - Russia and China could also step up cooperation in areas apart from energy.
CAST's Kashin said the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, would grow.
China is very interested in investing in infrastructure, energy and commodities in Russia, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic industries.
"With Western sanctions, the atmosphere could change quickly in favor of China," said Brian Zimbler Managing Partner of Morgan Lewis international law firm's Moscow office.
Russia-China trade turnover grew by 8.2 percent in 2013 to $8.1 billion but Russia was still only China's seventh largest export partner in 2013, and was not in the top 10 countries for imported goods. The EU is Russia's biggest trade partner, accounting for almost half of all its trade turnover.
DILEMMA FOR JAPAN, SUPPORT IN INDIA
Sechin, whose visit also included India, Vietnam and South Korea, is a close Putin ally who worked with him in the St Petersburg city authorities and then the Kremlin administration, before serving as a deputy prime minister.
In Tokyo, he offered Japanese investors more cooperation in the development of Russian oil and gas.
Rosneft already has some joint projects with companies from Japan, the world's largest consumer of LNG, and Tokyo has been working hard under Prime Minister Shinzo Abe to improve ties with Moscow, despite a territorial dispute dating from World War Two.
But Japan faces a dilemma over Crimea because it is under pressure to impose sanctions on Moscow as a member of the Group of Seven advanced economies.
It does not recognize the referendum on Crimea's union with Russia and has threatened to suspend talks on an investment pact and relaxation of visa requirements as part of sanctions.
Closer ties are being driven by mutual energy interests. Russia plans to at least double oil and gas flows to Asia in the next 20 years and Japan imports huge volumes of fossil fuel to replace lost energy from its nuclear power industry, shut down after the 2011 Fukushima disaster.
Oil imports from Russia rose almost 45 percent in 2013 and accounted for about 7 percent of supplies.
But if the dilemma is a tough one for Japan, it is unlikely to cause Putin much lost sleep.
"I don't think Putin is worried much by about what is said in Japan or even in Europe. He worries only about China," said Alexei Vlasov, head of the Information and Analytical Center on Social and Political Processes in the Post-Soviet Space.
Putin did take time, however, to thank one other country apart from China for its understanding over Ukraine and Crimea - saying India had shown "restraint and objectivity".
He also called Indian Prime Minister Manmohan Singh to discuss the crisis on Tuesday, suggesting there is room for Russia's ties with traditionally non-aligned India to flourish.
Although India has become the largest export market for U.S. arms, Russia remains a key defense supplier and relations are friendly, even if lacking a strong business and trade dimension, due to a strategic partnership dating to the Soviet era.
Putin's moves to assert Russian control over Crimea were seen very favorably in the Indian establishment, N. Ram, publisher of The Hindu newspaper, told Reuters. "Russia has legitimate interests," he added.
For Putin, the Crimea crisis offers a test case for ideas he set out in his foreign policy strategy published two years ago as he sought a six-year third term as president.
He said at the time he wanted stronger business ties with China to "catch the Chinese wind in the sails of our economy". But he also said Russia must be "part of the greater world" and added: "We do not wish to and cannot isolate ourselves."
Two years on, he is closer to securing the first goal, but it is not yet clear how his population feels he has done on the second.




Gas Talks Between Ukraine And Gazprom Cancelled, Naftogaz Chairman Detained On Corruption Probe

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Yesterday we warned that the honeymoon is over as Ukraine expects gas prices to rise 40% as Russian discounts fade. Today it appears the situation is even worse:
  • *NAFTOGAZ, GAZPROM TALKS FOR MARCH 20-21 CANCELLED: INTERFAX
  • *UKRAINE POLICE DETAINS NAFTOGAZ CHAIRMAN BAKULIN: AVAKOV
  • *UKRAINE NAFTOGAZ RAID PART OF CORRUPTION PROBE, AVAKOV SAYS
The issues up for debate, of course, are supply and pricing of gas from Russia and the payment for over $2bn of existing debt owed. While Interfax reports that this was because the Ukraine gas company executive was unable to leave the country, which now appears due to corruption allegations ("there's corruption going on here?") but merely exacerbates any Russian gas retaliation concerns.
Talks originally planned to take place on March 20 and March 21 between Ukraine's national oil and gas company Naftogaz Ukrainy and Russian gas giant OJSC Gazprom (MOEX: GAZP) have fallen through at the last minute, a source from the Ukrainian government told Interfax.

"The Naftogaz Ukrainy delegation was prepared to fly out [for the meeting], but the head of the company [Naftogaz Ukrainy] was not allowed to leave the country at the last minute," the source said.

The main issues to be discussed were supposed to be the purchase and transit of natural gas, as well as the payment schedule for existing debt.

The source said this concerned a personal ban on leaving the country for Naftogaz's CEO Yevgeny Bakulin.
What is certain, is that the struggling population, most of whom never wanted the recent political overhaul and were quite happy with life as it was, will suddenly demand a return to the living standards under the old, if "horrible" regime, and demand an even quicker overhaul of the current administration.

Something Putin knows all too well.

Why does he know it? Because current events are a carbon copy of what happened in 2007 that led to the infamous 2008 Ukrainian political crisis.






Russian sanctions as war and farce
By Pepe Escobar

If we come to a minefield, our infantry attacks exactly as if it was not there - Marshal Georgy Zhukov

Let's start with the serious stuff. As Russia's Federation Council ratifies a treaty with Crimea, concluding the formal annexation, Ukraine signs the political chapters of an association agreement with the European Union (EU). The signing of the full EU agreement will only happen later in 2014.

These are the facts on the ground. Now let's turn to comedy hour - also known as the sanctions war.

The oh-so democratic EU has punished the democratic Crimeareferendum by sanctioning 33 Russians and Crimeans with asset freezes and travel bans, according to that Magritte-style walking fiction, European Council President Van Rompuy. The EU also canceled the EU-Russia summit in Sochi on June 3. And the vast, Kafkaesque bureaucracy of the European Commission (EC) has taken time out from subsidizing European cows to prepare for "possible economic sanctions", according to German Chancellor Angela Merkel. 

The EU is irretrievably split on what to do. Whatever it does, Moscow's capacity to make the EU badly hurt is stronger. There may be another meek set of sanctions next week, as Merkel advertised. But that's it.

European poodle action mirrors His Master's Voice - as in US President Barack Obama solemnly imposing, by executive order, further sanctions on "senior officials of the Russian government." Other US targets are private businessmen close to Russian President Vladimir Putin. Only exceptionalist logic legally allows sanctions on private individuals deemed responsible for political steps taken by the country they live in. International lawyers should have thought about sanctioning the entire US population for the Bush-Cheney junta's disaster.

Well over 60% of Americans and Europeans are against a New Cold War against Russia. Putin's approval rating in Russia is around 75% - and arguably similar all across the developing world. Still, no one will lose money betting on the juvenile amateurism of the Obama administration. As if they and selected European minions could intimidate Moscow with some cosmetic "message". The American sanction religion, imposed with a conquistador/slave owner fury, did destroy Iraq for years - and was supposed to destroy Iran as well. But Russia is not Iraq or Iran.

I love a man in sanction uniform

Sanctioned Russians are not exactly quaking in their made-in-London brogues. After all, the practical impact of these sanctions is exactly zero. And most people targeted have minimal direct links with the US. 


The original American list included Deputy Prime Minister Dmitri Rogozin and presidential aide Vladislav Surkov. They laughed it off, loudly - adding it felt like a badge of honor. The expanded list includes key Putin advisers and even some of his friends.

Obama, Iran-style, sanctioned the Bank of Russia - a minor player (less than US$10 billion in assets; compare it with giant Sberbank at $528 billion). But Bank of Russia is used by some Gazprom subsidiaries for some low-key deals - even as Gazprom owns its own bank, GazpromBank. The "message" here is that Washington is watching Gazprom.

Chief of Presidential Administration Sergei Ivanov is a key adviser on Ukraine and a top negotiator with the US, the EU and NATO. The - counterproductive - "message" implied here is that Moscow and Washington are not talking anything substantial in the immediate future. So much for the West's "diplomatic efforts".

Then there's Yuri Kovalchuk, a board member of the Bank of Russia, a key business adviser and - allegedly, no conclusive evidence - Putin's personal banker. The message here is of the "I'm gonna git you sucka" kind.

Finally, among the notables, there's Gennady Timchenko, who has absolutely nothing to do with Ukraine. He's an energy deal operator, controlling oil and natural gas trading firm Gunvor. In this case, the "message" is that the US will target Russia's energy deals. Message void, because the EU - which needs Gazprom badly - is not inclined to sanction Timchenko.

Other sanctioned include the head of the Federal Drug Control Service Viktor Ivanov, Chief of Military Intelligence Igor Sergun and Russian Railways President Vladimir Yakunin.

They are all part of the Russia-US team involved in the Northern Distribution Network - the long, across-Central Asia highway that will allow NATO to flee Afghanistan. A swift Moscow counter-attack would be to leave the Americans and Europeans hanging dry - or to close the NDN altogether. 

I want to be sanction-free


Moscow, predictably, struck back. The Russian Foreign Ministry has "repeatedly" stressed that using sanctions is a "double-edged thing" and it will have a "boomerang" effect against the US.

Already barred from entering Russia is a nasty bunch including the senile John McCain, plus Robert Menendez, Daniel Coats, Mary Landrieu, Harry Reid, John Boehner and Obama advisers such as the cosmic mediocrity Ben Rhodes. Vicky "F**k the EU" Nuland has not made the list - yet.

Moscow is playing it cool because it may choose among a staggering array of counterpunches. It enjoys the support of the BRICS group of emerging powers, the non-aligned movement (NAM) and the Shanghai Cooperation Organization (SCO). Composing with the US, Moscow agreed to impose sanctions on Iran, and is a key player in the P5+1 nuclear negotiations. If the sanction comedy goes on, Moscow has already announced it will play hardball with the P5+1, will cease to sanction Iran, and may even, finally, weaponize Tehran with jewels of the S-400 variety.

Moscow - the number one oil and gas exporter on the planet - can also play further hardball with Europe's dependency on Gazprom; clinically target US companies working in Russia; speed up the BRICS-coordinated escape from the US dollar, as in a new international payment system in a basket of currencies for the BRICS as well as other emerging markets; and even activate the ultimate economic nuclear bomb - which is to accept payment for Russian oil and gas in ruble, yuan, euros or gold, thus delivering a terminal blow to the petrodollar.

And that, ladies and gentlemen, will be the end of the comedy hour.